Shareholder agreements

If your corporation has more than one shareholder, a shareholders’ agreement should be drawn up to establish the ongoing rights and responsibilities of the shareholders in the ownership and administration of the company.

One of the more important aspects of the shareholders’ agreement is that it should specify what should happen in the event of the death or disability of one of the shareholders. Not only will this provide for a smooth transition of the business, but such agreements also generally establish a purchaser for the shares of the deceased, a formula for determining the purchase price and a method for funding the purchase. By arranging proper tax planning, the buyout can be orchestrated to minimize a drain on cash flow for the company and survivors. A sound arrangement can also minimize or defer the tax liability of the estate. Life insurance is often used to fund a buy-sell agreement or share repurchase on the death of a shareholder. It’s highly recommended that you speak with your tax adviser to develop a plan appropriate to your situation.